Originally uploaded in SSRN.

Abstract

This article considers whether the Treasury's check-the-box regulations, which have been widely praised by tax practitioners, are valid. These regulations generally allow any unincorporated entity to elect whether it will be treated as a corporation or a partnership for tax purposes. When these regulations were first proposed, there was some debate as to whether such an elective regime was foreclosed by the statutory scheme, which requires that "associations" be taxed as corporations. This article argues that the focus of this debate was misplaced because, even assuming that the statutory scheme itself was sufficiently ambiguous as to permit an elective regime, the meaning of the term "association" was settled by the Supreme Court in the 1935 case of Morrissey v. Commissioner. In that case, the Court interpreted the term to mean any unincorporated entity that sufficiently resembles a corporation. Because this interpretation is inconsistent with a purely elective regime, this article argues that thecheck-the-box regulations are invalid.

The basis for this argument is a trilogy of Supreme Court opinions that hold that when the Court interprets a statutory term, that interpretation is binding on the Executive Branch and may be altered only by an act of Congress or a subsequent opinion of theCourt. Therefore, these cases stand for the proposition that, at least as far as the Executive Branch is concerned, a judicial interpretation of a statute is effectively incorporated into the underlying statute.

This article also argues that the promulgation of the check-the-box regulations are but one example of the Treasury's and the IRS' recent tendency to promulgate taxpayer-friendly rules that are invalid. The article discusses the etiology of this phenomenon.

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